US Strategic Petroleum Reserves

So now our US government is using our SPR for oil price manipulation, absolutely amazing..So much for free markets--ha! A friggin joke that won't stop peak oil or supply/demand dynamics (an oil service, deep water driller stock buying op!) "part of an international effort" ya right, part of a vote getting effort! A sad day for capitalism,IMO.

The Obama administration today backtracked on its plan to make it easier for foreign-based ships to move the millions of barrels of emergency crude oil the government hopes to sell to ease expected tight global supply.

News wires 24 June 2011 16:18 GMT

Under the administration's plans announced yesterday to sell 30 million barrels of oil from the Strategic Petroleum Reserve, the government said it would provide an automatic waiver from the Jones Act, a federal law that prevents foreign ships from transporting US goods, including crude oil, between American ports.

The Jones Act, created to support jobs in the US maritime industry, requires that goods moved between US ports be carried by ships built domestically, owned by Americans with US crews.

The administration reversed its decision today following criticism from the US maritime sector.

"We are dumbfounded by President Obama's decision to disregard the American maritime industry, which has sufficient capacity to complete this work," Reuters quoted the American Maritime Partnership as saying today.

The Energy Department updated the terms of the oil sale this morning, saying there would no longer be an automatic waiver of the US shipping law.

However, companies wanting to transport by water any of the SPR crude could still apply to the government for a waiver of the Jones Act.

The department said there would be plenty of US-flagged vessels available to move the crude.

Oil prices rallied more than $3 a barrel on Wednesday, recovering all the losses triggered by last week’s decision by rich consuming nations to release strategic oil stocks.

Brent crude, the global benchmark, jumped to a peak of $112.48 a barrel, the highest since last Thursday, when the International Energy Agency announced its members would sell 60m barrels of oil, the third co-ordinated sale from the reserves in the organisation’s history.

Amid heavy selling in the days that followed the IEA’s move, Brent traded as low as $102.28. Since that level was reached on Monday, however, prices have rallied 10 per cent, or just over $10 a barrel.

A reappraisal of the impact of the IEA’s intervention triggered the reversal. Traders have shifted their focus to an expected oil supply squeeze in the next few years instead of the prospect of an additional 2m barrels a day of oil for a month.

“The reality remains that the current market is still grappling with a structural change that has effectively resulted in the gain of some five years of oil demand in one year,” said Amrita Sen, oil analyst at Barclays Capital.

The IEA’s action could exacerbate the longer-term supply squeeze if it succeeded in suppressing prices in the short term, Ms Sen argued.

“Emerging market economies are often criticised for not allowing their consumers to face the true price of oil through heavy subsidies, thereby keeping demand inflated. We fear the IEA has done exactly the same [in the rich countries],” she said.

Adding further fuel to the rally on Wednesday were positive numbers on US oil demand.

Crude oil inventories in the US, the world’s largest oil consumer, fell 4.4m barrels last week, according to the US Department of Energy. Gasoline stocks were also drawn down by 1.4m barrels.

While the data indicated total demand declined by 330,000 b/d from a year earlier, the drop was the smallest since early May, according to Michael Wittner, head of oil research at Société Générale.

The market is also concerned that Opec countries may decide to scale back previous plans to lift production in an attempt to keep the market tight and prices high.

However, the IEA said last week that Saudi Arabian supply could reach 9.5m b/d this month, the highest in six years and approaching a 30-year high reached in 2004 when the kingdom boosted production to offset losses triggered by the war in Iraq.

The return of more bullish sentiment to the oil markets helped spur a recovery in differentials between different types of crude oil, which had collapsed in the wake of the IEA announcement.

The difference between high quality Brent and lower quality Dubai crudes rebounded to $4.85 a barrel from a low of $3.30 on Monday. Moreover, the discount for Brent for delivery in August relative to longer-dated contracts narrowed sharply.

“With European refining margins recovering very strongly during the last few days, it’s likely the Brent structure will strengthen again as refiners are enticed back to the market to buy crude,” said James Zhang, oil analyst at Standard Bank.

The IEA decision to release 60 million barrels from strategic petroleum reserves (SPR) of member nations has been criticized as politically motivated, too small and too late to matter, or, at best, as a desperate attempt to fend off economic woes. The reality and impact of the decision are more complex than that. The move is a bold, price-suppressing “poke in OPEC’s eye” from nations that have been perpetual price takers in the world oil market. The short-term rationale for the decision, however, should not obscure our real oil problem - geopolitics is combining with economics and geology to put us in an oil crunch that is not likely to abate until our nation moves beyond oil.

The timing and volume of the decision make sense, and one need only to look at the vigorous complaints from Iran to gauge its significance. The Libyan conflict became a factor in February, and it took time to recognize that its 1.3 million barrels per day export volume was lost to the market on a relatively long-term basis, and to fully grasp the impact on the OECD economies. It took time to see that OPEC’s promise to cover the loss had little substance, as confirmed by the recent OPEC meeting.

That the released volume is less than a day of world oil consumption does not diminish its significance for oil prices. Oil prices are driven not by supply and demand directly, but by their effect on oil inventories, and how current stocks of oil compare to past levels. The addition of 60 million barrels of oil is significant relative to presently available stocks (J.M. Bodell, personal communication).

Strategic reserves are not ordinarily counted in comparative inventories and not factored into price formation or price forecasts. The IEA action is an historically unprecedented step to influence price, and the market does not know how far governments may go to support consumers. Oil prices are likely to be suppressed until the market digests the changed conditions created by the IEA action.

Each IEA member has varying reasons to support the decision, but a common European motive is to reduce the negative effect of the Libyan conflict on oil price. The loss of Libyan oil exports is a major factor in the approximately $10 per barrel increase for Brent (North Sea) crude oil, the European price benchmark, whereas prices for West Texas Intermediate, which is more relevant to the United States, have been $10-20 per barrel below Brent prices (despite being lighter and sweeter). Europeans hope the SPR release will lower their oil prices at least through the summer high-demand period, which may provide sufficient time for Saudi Arabia and other Gulf states to boost supply, if they are able. If economic conditions worsen during that time, the reduction in oil demand may result in prices falling further on their own accord.

The IEA decision may have been Europe-driven, but the Obama administration recognizes that rising oil prices have been a headwind to economic recovery, and a looming issue for the 2012 elections. U.S. oil prices, however, had been falling for several weeks before the IEA decision, in part because high oil prices took a toll on demand across the economy, threatening a second dip of recession. The additional supply will have a smaller effect in the United States, but should still push down prices for the near and medium term, and help arrest trends toward renewed recession. Just as the U.S. government seemed to be “out of bullets”, a new bullet emerges - one that does not require an act of Congress.

Middle East and OPEC politics have also been underappreciated in the IEA decision. OPEC is deeply divided over the influence of Iran. Iran, a major oil-exporting nation populated with a Shiite majority and led by Shiite rulers, has been increasing its influence across the Arab world, especially following war and political changes in Iraq.

Iran, however, has little to no spare capacity to increase oil exports. Saudi Arabia, Abu Dhabi, Kuwait and Qatar - which may have spare capacity - are all Sunni-led, but Saudi Arabia’s oil-producing region and the whole of the other countries are inhabited by Shiite majorities. Leaders of these countries are justifiably nervous about rising Iranian and Shiite influence, especially amidst the unrest spreading across the Middle East. An increase in OPEC production or some other force to reduce oil prices, like the IEA decision, is a hit to Iran’s financial resources, and a boost to the relative power of other nations in the region.

Bold and unprecedented as it may be, the IEA decision should sound alarm bells about bigger problems, if they were not already ringing loudly. The only reason that 60 million barrels can have such an impact is because of rising prices and great uncertainty in the world oil market about spare capacity and the ability of any country other than (possibly) Saudi Arabia to substantially increase production, while production from most other countries is declining (i.e. Peak Oil is unfolding before our eyes). Even Saudi Arabia’s capacity to increase output is uncertain.

For those who prefer to focus on speculating oil traders to explain rising oil prices, the IEA decision should only encourage more traders to go long in oil. Blaming speculators can also distract decision makers and the public from acknowledging an impending oil supply crisis facing the United States and the world. Speculation may contribute to higher oil prices, but speculative buyers are driving up prices because the fundamentals say that oil prices are going up even further in the not too distant future.

The real problem facing the United States is that world oil supply is unlikely to meet rising global demand (principally from developing nations), and may decline sooner than many believe. Increasing domestic oil drilling and production may postpone the reckoning, but will not change the fact that U.S. oil production has been on an overall downward trend since 1970, and our dependence on imported oil - not just in the number of barrels we import, but in costs and risks to our economy - is rising.

The only way out is to adapt our economy and our communities to work in a way that requires less oil. And we need to do it fast.

I'll close this subjecting noting crude oil higher than prior to the IEA announcement (west texas 98.50 & brent @ 118.50) And with my faith restored in supply/ demand dynamics,and JPM proving capitalism is alive and well here in the US

As was previously disclosed, as part of the SPR's auctioning off of 30 million barrels of light sweet crude, bids for a total of 30.64 million barrels of oil at an average bid of $107.20/barrell were submitted by various parties. The only thing unknown was the identity of the parties, which however has now been all cleared up following the release of the complete bid list from the DOE. Probably the most notable (if not completely expected) discovery is that JPM, that FDIC-insured depositor bank, has requested 1.5 million barrels at a price of $105.33 for a total of $158 million. We wonder just what JPM plans on doing with this crude, which as predicted [1], will be transported by vessel, and offloaded at such time as JPM sees fit, probably well after the product is trading at a substantial premium to the purchase price. Other potential buyers include Valero, Vitol, Shell, Conoco, Plains and various other E&P companies. Ironically, JPM wants more crude than Sunoco and Tesoro: so next time one tries to gas up their car, we suggest looking for the JP Morgan gas station. But by far the most important news is that 80% of the bid are based on a vessel-based distribution, meaning it will be weeks if not months before the SPR disposed crude finally makes it into circulation, if at all, and has an actual supply-side benefit. Complete bid list is attached."

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